Results

• 1QFY17 revenue of RM141.37m translated into a net profit of RM5m which was below expectations, accounting for 18% and 16% of HLIB and consensus estimates respectively.

Deviations

• Margins were impacted by higher COGS denominated in USD.

Highlights

• YoY: Revenue rose 7% yoy to RM141.4m from 132.4m, deemed within expectation mainly due to opening of more Starbucks outlets in Malaysia and 1% SSSG. However, this was not reflected at the net income level which fell 18% to RM5m from RM6.1m due to exposure to forex volatility. As part of the agreement with Starbucks Corp (USA), BFood is required to purchase certain COGS (Coffee beans, Frappuccino mix, Packaging material etc.) in USD. Current weak ringgit caused Starbucks Malaysia COGS to increase significantly. (47% of Starbucks Malaysia’s COGS denominated in USD)

• QoQ: Revenue was up 2% qoq due to reasons mentioned above. However, net Income rose 58% qoq due to (i) high effective tax rate of 74% in 4QFY16 due to tax relief not being available to BFood from loss making overseas operations (KRR Indonesia and Jollibean Singapore), and (ii) interest costs of borrowings under subsidiary companies unable to be offset at the parent company level. Management guided effective tax rate going forward will be stable at 40%.

Risks

• Persistent low consumer sentiment.

• Nandos superior brand name to KRR threatens to take away more market share from a business unit that is already experiencing negative SSSG.

• Ringgit depreciation against USD.

Forecasts

• We reduce our FY17/18 net income forecasts by 18% (RM28m to RM23.2m) and 8% (RM30m to RM28m) respectively due to 1) higher assumed operating cost 2) Higher interest cost from higher borrowings.

Rating

HOLD, TP: RM1.55

• Positive
• Starbucks segment still has potential to grow topline
• Negative
• Persistent weak ringgit will hamper Starbucks Malaysia margins going forward.
• Unprofitable KRR Indonesia and Jollibean operations to continue to drag earnings.
• High effective tax rate expected to persist.

Valuation

• Maintain Hold with TP lowered to RM1.55 from RM1.86 based on a P/E multiple of 25x pegged to FY17 EPS.

Source: Hong Leong Investment Bank Research - 8 Sep 2016